Argentina plans debt swap with some creditors, seeking to sidestep US order on defaulted bonds

BUENOS AIRES, Argentina – The Argentine government plans to sidestep a U.S. court order that it repay defaulted bonds in full, saying creditors who accepted debt restructurings will be offered new bonds to be paid in Argentina rather than the United States.

Economy Minister Axel Kicillof said Tuesday that the government is "starting to take steps to begin a debt swap" to service the country's restructured debt in "Argentina and under Argentine law."

The announcement came a day after the U.S. Supreme Court refused to intervene in a U.S. judge's order that would deny use of the U.S. financial system to Argentina unless it first pays off holders of defaulted bonds who didn't accept the earlier debt swaps. Argentina has objected to paying the "holdout" creditors.

The high court also ruled that the holdout bondholders who won the legal case could use U.S. courts to force Argentina to reveal where it owns property around the world.

The arrangement outlined by Kicillof would involve investors who previously agreed to swap government bonds that were defaulted on in Argentina's 2001 economic collapse for new, less valuable bonds that the government has being paying on since 2005. Those new bonds are governed by U.S. law.

If Argentina were forced to pay off in full what the government calls "vulture funds," the country could become an easy prey and would ultimately be "pushed into a default," Kicillof said.

"Some say we should negotiate with vultures, but the vultures are vultures because they don't negotiate," he said. "If they were in conditions to negotiate, they would have done it like the rest of the bondholders."

President Cristina Fernandez criticized the U.S. judge's ruling requiring a $1.5 billion payment, of full value plus interest, to investors who didn't accept the previous debt restructurings.

In a national address Monday night, she defiantly vowed not to submit to "extortion" by NML Capital and other investors that refused to trade in defaulted bonds. But she said her government "will not default on those who believed in Argentina" by accepting the debt swaps.

While conceding the Supreme Court's decision was unfavorable, Kicillof kept the possibility of negotiation open, but said Argentina was not willing to "do anything, under any condition, to accept exorbitant conditions" to resolve the debt fight.

The court's decision was a blow to Argentina's aspirations to return to global credit markets after being shut out since its 2001-02 economic crisis and default.

Fernandez and her late husband and predecessor as president, Nestor Kirchner, negotiated or paid off most of the country's defaulted debt. Argentina has paid its debt with the International Monetary Fund, and in May it agreed with the Paris Club of creditor nations on a plan to resolve $9.7 billion in debts that have gone unpaid since the economic collapse.

Bowing to the U.S. ruling would force Fernandez to betray a core value that she and her late husband promoted since they took over the government in 2003: Argentina must maintain its sovereignty and economic independence at any cost.

The president's hard line on the U.S. ruling seemed to be a last effort to gain leverage ahead of a negotiated solution that both sides say they want.

With only days before a huge debt payment ordered by the court is due, many analysts and politicians say negotiations with the holdout investors are needed to avoid a new default and a blow to the country's reputation.

"Another default can be quite costly economically and financially," Alberto Ramos, Latin America economist for Goldman Sachs, said. "And the uncertainty and volatility that would generate would put added pressure on an already struggling economy, on the exchange rate, and therefore also on reserves."

But Argentina's Merval stock index, which had plunged 10 percent after Monday's court decision, rebounded Tuesday and closed up 3.75 percent on hopes the government would announce a solution.

Daniel Kerner, an analyst at Eurasia Group, said the debt swap announced by Kicillof was probably meant to strengthen Argentina's position in negotiations. But Kerner said a new debt swap would have to be agreed on quickly, or Argentina would risk missing a June 30 deadline for making payments on the existing bonds and falling in to default.

Still, he cautioned in an email statement that while Argentina wants to negotiate, it should be recognized that "the government is willing to default and has limits as to how much they can concede."